No Appeal of CLO Exemption from Risk Retention

In February, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the Loan Syndications and Trading Association (LSTA) in its litigation against the U.S. Securities and Exchange Commission and Federal Reserve Board regarding the application of risk retention rules to CLO managers of "open market CLOs". The ruling stated:

• "Because we agree with the CLO managers that they are not "securitizers" under § 941, the managers need not retain any credit risk."

• "The judgment of the district court is reversed and the case is remanded with instructions to grant summary judgment to the LSTA on whether application of the rule to CLO managers is valid under § 941, to vacate summary judgment on the issue of how to calculate the 5 percent risk retention, and to vacate the rule insofar as it applies to open-market CLO managers."

Now that the deadline for appeal by federal regulators of the D.C. Circuit Court's ruling having expired expired at midnight on March 26th, the Circuit Court is expected to mandate the District Court vacate its previous ruling that risk retention applies to “open-market” CLOs, according to an Asset Securitization Report article. The order to vacate should be filed with the district court within seven days, or April 2.

Once the order has been filed, managers of CLOs, as a legal matter, will be free to unload stakes they are holding in existing deals that comply with the risk retention rules and, again, be free to issue new deals without tying up any of their own capital.

Still, the possibility remains that the FRB and/or the SEC will directly appeal the ruling to the U.S. Supreme Court, both agencies still have another 45 days to choose whether to do so. As a result, the underwriters may want to see what happens before changing structures. 

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